Digital Entertainment

Sirius XM: What Price Bankruptcy?

A bankruptcy filing by Sirius XM would have widespread implications not just for holders of the satellite radio company's debt and shares, but also for millions of listeners and for the celebrities like Howard Stern whose fat paychecks have made it harder for the company to pay its other bills.

The few poor souls who still hold Sirius XM (SIRI) stock may get poorer still. "I'll lose $1 million," says Michael Hartleib, a longtime activist shareholder. "They completely destroyed a perfectly viable company." Shares of the company closed at 11.39¢ on Feb. 10 after The New York Times said the company is preparing for a possible filing for Chapter 11 protection from creditors. Sirius declined to comment on the report.

EchoStar Takeover Is Rebuffed

While shareholders get wiped out when a company files for bankruptcy, debtholders typically sweat out a long and often complicated reorganization and are forced to accept pennies on the dollar in debt repayment. EchoStar (SATS), a maker of TV set-top boxes, has been buying up Sirius XM debt in a bid to take over the company, The Wall Street Journal has reported.

EchoStar might have used Sirius equipment and airwaves to deliver satellite Internet and video services, but Sirius XM has resisted overtures, the newspaper has said. Sirius XM Chief Executive Officer Mel Karmazin was unwilling to give up the company reins, says Standard & Poor's analyst Tuna Amobi. "It's shifted, ironically, from survival to a battle for control," Amobi says. "I don't think Mel is going to be willing to relinquish control." EchoStar did not return a request for comment.

Sirius XM is struggling to meet nearly $1 billion in debt obligations due this year, with the first installment due Feb. 17 and another in May. Analysts say part of the blame for the company's financial woes lies with expensive distribution deals with automakers and high-priced talent.

Will Howard Stern Walk?

Amid the reorganization, Sirius XM may get the chance to renegotiate agreements with Stern and his team, who are paid $80 million a year, as well as with brands like Major League Baseball. "Maybe both parties have the opportunity to walk away from their existing agreement," RBC Capital Markets analyst David Bank says of the Stern deal. Perhaps Stern would settle for less pay. But he may also choose to switch employers or retire, as he's threatened to do on air—a move that could prove disastrous for Sirius, many of whose users pay up specifically to hear Stern.

Similarly, Sirius XM may be able to renegotiate contracts with automakers, which install its radios in cars and receive a portion of subscription fees. Some analysts believe those revenue-sharing deals could be halved, particularly since auto sales have plummeted. Worried about job losses and mortgage payments, many consumers eschew services like satellite radio. "It's going to be a lot more challenging to get people to invest in your products when you are in Chapter 11," says Larry Rosin, president of Edison Media Research.

Even more radical ideas may come to the fore. Sirius XM could change its business model to become a provider of audio content that's streamed over the Web, wireless, and all other types of networks—without owning its own network. Perhaps Sirius could even sell some of its programming, such as exclusive live concerts, as downloads, for an extra fee. "Sirius XM is a channel aggregator," says Susan Kevorkian, a program director at researcher IDC. "Satellite radio may be artificially limited in its scope by relying on satellite technology as a delivery vehicle."